3. INVESTMENT IN OIL AND GAS PROPERTIES

Investment in oil and gas properties consists entirely of our Guinea Concession in offshore West Africa. We owned a 77% participating interest in our Guinea Concession prior to the sale of a 40% gross interest to Tullow which closed on December 31, 2012. We now own a 37% interest in the Concession.

Guinea Concession

We have been conducting exploration work related to the area off the coast of Guinea since 2002. On September 22, 2006 we entered into the PSC with Guinea. Under that agreement, we were granted certain exclusive contractual rights by Guinea to explore and exploit offshore oil and gas reserves, if any, off the coast of Guinea. We are conducting our current work in Guinea under the PSC, as amended on March 25, 2010.

The PSC Amendment clarified that we retained a Contract Area of approximately 25,000 square kilometers, which is approximately equivalent to 9,650 square miles or 30% of the original Contract Area under the PSC, following a December 31, 2009 relinquishment of approximately 70% of the original Contract Area. The PSC Amendment required that the Consortium relinquish an additional 25% of the retained Contract Area by September 30, 2013. Under the terms of the PSC Amendment, the first exploration period ended and the Consortium entered into the second exploration period on September 21, 2010. The second exploration period ran until September 2013, at which point it was renewed to September 2016 and may be extended for one (1) additional year to allow the completion of a well in process and for two (2) additional years to allow the completion of the appraisal of any discovery made.

The PSC Amendment required the drilling of an exploration well, which had to be commenced by the year-end 2011, to a minimum depth of 2,500 meters below seabed. This requirement was satisfied with the drilling of the Sabu-1 well which was commenced during October of 2011 and reached the minimum depth of 2,500 meters below the seabed in February of 2012. The Consortium is required to drill an additional exploration well, which is to be commenced by the end of September 2016, to a minimum depth of 2,500 meters below seabed. The PSC Amendment requires the expenditure of $15 million on each of the exploration wells ($30 million in the aggregate). The Consortium was also required to acquire a minimum of 2,000 square kilometers of 3D seismic by September 2013 with a minimum expenditure of $12 million. This requirement was satisfied with the first 3D seismic survey acquired in 2010. Fulfillment of work obligations exempts us from expenditure obligations and exploration work in excess of minimum work obligations for each exploration period may be carried forward to the following exploration period.

Under the PSC Amendment, Guinea may participate in development of any discovery at a participating interest of up to 15% of costs being carried for its share. The cost of that carry is to be recovered out of 62.5% of Guinea’s share of cost and profit oil. The PSC Amendment removed the right of first refusal held by us covering the relinquished acreage under the original PSC. The PSC Amendment clarified that only those eligible expenditures, which were made following the date the PSC was signed, on September 22, 2006, are eligible for cost recovery. We are required to establish an annual training budget of $200,000 for the benefit of Guinea’s oil industry personnel, and we are also obligated to pay an annual surface tax of $2.00 per square kilometer on our retained Concession acreage. The PSC Amendment also provides that should the Guinea government note material differences between provisions of the PSC Amendment and international standards or the Petroleum Code, the parties will renegotiate the relevant articles.

In July 2013, a proposal was submitted for a Second Amendment to the PSC (the “Second PSC Amendment”) to the Government of Guinea formally adding Tullow as a Contractor to the PSC as well as addressing other administrative issues.

Under the PSC and PSC Amendment our Guinea Concession is subject to a 10% royalty interest to Guinea. Of the remaining 90% of the first production, we will receive 75% of the revenue for recovery of the cost of operations, and Guinea will receive 25%.

After recovery cost of operations, revenue will be split as outlined in the table below:

Daily production (b/d)	Guinea Share		Contractor Share
From 0 to 2,000	25	%	75	%
From 2,001 to 5,000	30	%	70	%
From 5,001 to 100,000	41	%	59	%
Over 100,001	60	%	40	%

The Guinea Government may elect to take a 15% working interest in any exploitation area.

In May 2010, the government of Guinea issued a Presidential Decree approving the PSC, as amended for the sale of the 23% participating interest to Dana, and again in December 2012 for the sale of a 40% gross interest to Tullow.

Sale of Interest to Tullow

On December 31, 2012, we closed a sale to Tullow of a 40% gross interest in the Concession. As consideration, we received $27 million from Tullow as reimbursement of our past costs in the Concession and, as additional consideration, Tullow agreed to: (i) pay our participating interest share of future costs associated with the drilling of an exploration well in at least 2,000 meters of water in the deep water fan area of the Concession, up to a gross expenditure cap of $100 million; and (ii) pay our share of costs associated with an appraisal well of the initial exploration well, if drilled, subject to a gross expenditure cap on the appraisal well of $100 million. Tullow was obligated to pay its 40% participating interest share of costs associated with the Concession as of November 20, 2012, the date of execution of SPA. Tullow began to pay our costs attributable to the Concession on September 21, 2013. Tullow will continue to pay our costs, subject to the gross expenditure cap of $100 million, until 90 days following the date on which the rig contracted to drill the exploration well moves off the well location. Tullow agreed to use reasonable endeavors to provide for the commencement of drilling of the exploration well not later than April 1, 2014. The $27 million payment was received by us on December 31, 2012 and was recorded as a reduction in unproved oil and gas properties, net of transaction costs of approximately $3.3 million.

In connection with the transaction, SCS, Tullow and Dana entered into a Joint Operating Agreement Novation and Amendment Agreement reflecting that as a result of the sale to Tullow, the interest of the parties in the Concession are SCS 37%, Dana 23%, and Tullow 40%, and that Tullow will be bound by the PSC and the Joint Operating Agreement previously entered into between SCS and Dana. Tullow will assume all the respective liabilities and obligations of SCS in respect of the assigned 40% interest. SCS and Tullow executed a Deed of Assignment. The Assignment was approved by Guinea’s Ministry of Mines and Geology by issuing an Arrêté on December 27, 2012 which formally authorized our assignment of a participating interest to Tullow. SCS, Dana and Tullow have elected Tullow as the Operator of the Concession beginning April 1, 2013.

Accounting for oil and gas property and equipment costs

We follow the “Full-Cost” method of accounting for oil and natural gas property and equipment costs. Under this method, internal costs incurred that are directly identified with exploration, development, and acquisition activities undertaken by us for our own account, and which are not related to production, general corporate overhead, or similar activities, are capitalized. For the year ended June 30, 2013 we capitalized $2.7 million of such costs respectively. Capitalization of internal costs was discontinued April 1, 2013 when Tullow became the operator. Geological and geophysical costs incurred that are directly associated with specific unproved properties are capitalized in “Unproved properties excluded from amortization” and evaluated as part of the total capitalized costs associated with a prospect. The cost of unproved properties not being amortized is assessed to determine whether such properties have been impaired. In determining whether such costs should be impaired, we evaluate current drilling results and available geological and geophysical information.

We exclude capitalized costs of unproved oil and gas properties from amortization until evaluated. Geological and geophysical information pertaining to the Guinea concession was collected and evaluated and no reserves have been attributed to the Concession. In February 2012, we completed the drilling of the Sabu-1 well, which was determined to be non-commercial. As a result, we evaluated certain geological and geophysical related costs in unproved properties along with the drilling costs of the Sabu-1 well totaling $116.8 million and determined that these properties were subject to the Full-Cost Ceiling Test. As we have no proved reserves to include in the Full-Cost Ceiling Test, the entire $116.8 million resulted in a Full-Cost Ceiling Test write-down of our unproved oil and gas properties. The net costs associated with properties which remain unproved and unevaluated and are excluded from amortization were $14.3 million and $21.2 million, as of June 30, 2014 and 2013, respectively.

The following table provides detail of total capitalized costs for our Guinea Concession as of June 30, 2014 and 2013 (in thousands):

	June 30, 2014	June 30, 2013
Oil and Gas Properties:
Unproved oil and gas Properties	14,259	14,365
Other Equipment Costs	—	6,809
Unproved properties not subject to amortization	14,259	21,174

During the year ended June 30, 2014, our oil and gas property balance declined by $0.1 million as a result of a credit received from Tullow as a correction of costs previously billed to us. Additionally, during the year ended June 30, 2014, our oil and gas property balance decreased by $6.8 million after reaching a lawsuit settlement with AGR that resulted in the release to AGR of excess drilling equipment and the release to us of $17.7 million of previously escrowed cash. Evaluation activities of these unproved properties are expected to be completed within the next one to three years.

In prior periods we had presented oil and gas properties on the Consolidated Balance Sheets and within this footnote on a gross basis with the impaired properties presented as proved oil and gas properties, then fully amortized after applying the Full-Cost ceiling test, resulting in the net amount of unproved oil and gas properties. In the current period we have revised our disclosures to eliminate any amounts identified as proved oil and gas properties, and have presented the Full-Cost ceiling test write-down directly against the unproved property account. All prior periods presented were conformed to follow the current period presentation.

Write-off of Prospective Investment Deposit

We made payments of $5.0 million each in connection with a prospective oil and gas investment on September 20, 2011 and November 15, 2011. The $10.0 million in deposits were to have been credited on the purchase price of the prospective investment. As negotiations terminated without an agreement, we wrote off this deposit. The $10.0 million write off has been included as an operating expense in our Statement of Operations for the year ended June 30, 2012.